Monday, December 13, 2010

General Electric (GE) raises dividends again –should you care?

Last week industrial conglomerate General Electric (GE) raised distributions by 17% to 14 cents/share. Equity investors viewed this boost in a positive way, sending GE stock price higher for the day. This was the second dividend increase for GE in 2010, after the company boosted its payout by 20% earlier this year to 12 cents/share. Dividend increases are typically a bullish sign from companies, which shows their confidence that their business would be able to generate sufficient cash flow in order to pay the higher distribution amount. For GE however, this stunning 40% increase in the quarterly distribution comes after it cut dividends from 31 cent/share to 10 cents/share in 2009 during the financial crisis. Furthermore, investors who are hoping that GE might eventually restore its dividend payment to the 2008 levels, should realize that it might take several years for this to happen.

The reason behind this is that in order for a company to function effectively, it needs to reinvest a portion of its earnings back into the business either to expand, innovate or maintain its position in the marketplace. With GE expected the earn $1.12/share in 2010 and $1.27/share in 2011, this puts a limit on the amount of dividends the company could distribute in the near term. That being said, I would wait for a few years in order to see whether General Electric (GE) would be able to generate earnings growth which will support a growing distribution over time.

Other companies which increased distributions last week include:

Nucor Corporation (NUE), together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally. The company announced a 0.70% increase in its quarterly dividend to 36.25 cents/share. This marked the thirty-eight consecutive annual dividend increase for this dividend champion. Yield: 3.50% (analysis)

Erie Indemnity Company (ERIE) provides sales, underwriting, and policy issuance services to the policyholders of Erie Insurance Exchange in the United States. The company announced a 7.30% increase in its quarterly dividend to 51.50 cents/share. This marked the twenty first consecutive annual dividend increase for this dividend achiever. Yield: 3.20%

Edison International (EIX), through its subsidiaries, engages in the supply of electric energy in central, coastal, and southern California. The company announced a 1.60% increase in its quarterly dividend to 32 cents/share. This marked the eight consecutive annual dividend increase for Edison International. Yield: 3.40%

C.H. Robinson Worldwide, Inc. (CHRW) operates as a third party logistics company. The company announced a 16% increase in its quarterly dividend to 29 cents/share. This marked the fourteenth consecutive annual dividend increase for this dividend achiever. Yield: 1.50%

Stryker Corporation (SYK), together with its subsidiaries, operates as a medical technology company worldwide. The company operates in two segments, Orthopaedic Implants and MedSurg Equipment. The company announced a 20% increase in its quarterly dividend to 18 cents/share. This marked the eighteenth consecutive annual dividend increase for this dividend achiever. Yield: 1.40%

Roper Industries, Inc. (ROP) engages in designing, manufacturing, and distributing energy systems and controls, scientific and industrial imaging products and software, industrial technology products, and radio frequency products and services. The company announced a 16% increase in its quarterly dividend to 11 cents/share. This marked the eighteenth consecutive annual dividend increase for this dividend achiever. Yield: 0.60%

Occidental Petroleum Corporation (OXY), together with its subsidiaries, operates as an oil and gas exploration and production company primarily in the United States. The company announced a 21% increase in its quarterly dividend to 46 cents/share. This marked the ninth consecutive annual dividend increase for this dividend stock. Yield: 2%

The Toro Company (TTC) engages in the design, manufacture, and marketing of turf maintenance equipment and precision irrigation systems to help customers worldwide care for golf courses, sports fields, public green spaces, commercial and residential properties, and agricultural fields. The company raised its quarterly distribution by 11% to 20 cents/share. The company has raised dividends for seven years in a row. Yield: 1.30%

Instead of speculating whether GE would be able to raise distributions in the future, investors should be focusing on the companies which already have a history of raising dividends, and no dividend cuts. Several such companies which I plan on researching further include Occidental Petroleum Corporation (OXY), Stryker Corporation (SYK), Erie Indemnity Company (ERIE) and Edison International (EIX). I have recently added to my position in Nucor (NUE), which is expected to generate sufficient amount of earnings to cover distributions in 2011 and beyond on strong global demand.

9 comments:

Wow. So you dumped the stock at its lows, less than 9 I'm guessing, at the lows on bad news, after a huge decline. And now it has doubled, increasing dividends and you refuse to buy waiting for, what, more good news. LOL....Stick with dividend investing, cause you aren't close to understanding how the market works.

Thanks for what you write here. You do stick to Dividend Investing, and I am sure it serves you, and many others like me who have been educated by your research, very well. As others have pointed out, the upside of solid dividend stocks, many of which have an annualized 20 year return of over 13%, far outweighs the more rare selling of stocks whose dividends have been cut. In other words even if there are a few bad apples, the other 37 or so superior dividend stocks one ideally has in their basket far outweighs the minor losses of a few exceptions. Thanks again for your blog DGI.

Granted, we all make mistakes in trading...believe me, I've made my share. However, one of the cardinal rules of investing that I've seen work more than any other, is to buy the rumor and sell the news. On the downside, just the opposite. When companies, like GE & BP, regarding dividends in both cases, throw in the towel, after a long and murdeous decline, the gut says one thing....to sell, when the the mind must make the hard decision to go against the crowd and popular thinking, despite the violation of some trading rules, that might be in need of tweaking.

I think, perhaps, that those former dividend aristocrats that cut the dividend like GE might be the best dividend growers in the upcoming years as they try to restore faith. As a former employee of one bank that had to cut the dividend, and on speaking terms with it's CEO, I know that it is his intent to restore the dividend as quickly as they can.

The idea to rid oneself of the "losers" is correct, but not at the lows. Elimation of dividends is way too late of a signal to be making those kind of decisions. I sold my BP within days of the oil fire, it just did not make sense to hold it. I sold half of my GE postion at 30 & change, when it broke support at that level and the market acting like crap. More was let go in the lows 20's, holding some with long term faith in the company. I bought much it back the two days after the cut. Only wish I had done the same with BP, but I feared the government's overreach too much to do that.

Dividends are the last thing that a company wishes to cut, and as we have seen, there is much talk of not cutting the dividend before they cut the dividend. It is a lagging indicator, worse than earnings, cash flow or any other sign of distress. Just think about it, when a company mentions that they have no plans to cut the dividend, that means that something is "afoot", as Sherlock would say. The thin reed if you will, or the black swan effect.

Oh, I didn't mean to be so challenging in my first post, as I wanted to withdraw it right after I posted it, but regretfully could not. You do a pretty good job of researching these stocks and offering up an excellent site for free to the public. I came across your site simple looking for idea's that I might have missed and find your posts to be informative. After nearly 40 years in this business, I've learned that good ideas can come from the most unlikely of sources.

David in your example you also failed to consider what the re-investment was in.

If it was sold at 9, but then the proceeds were used to buy, say CAT (which I believe meets the criteria). You could have gotten in at ~$30 while the stock is at ~90. PLUS it would have had a better yield on cost (~5%).

Having a strong idea of what the goals of your portfolio are (speculation, value investing, div yield, div growth etc) and sticking to it (like selling at a div cut) helps take a lot of the guess work / gut feel out.

Now on to GE.

How much consideration should be considered to the fact that this is an company that has a culture of dividend growth? It has been in their executive culture for quite some time and they appear to be sticking to the mean rather than outlier.

If this is the case, do you wait for 10 years? Or do you try to get ahead of the curve and get a few extra years of growth in?

You have talked about changing entry criteria from <3% to <2.5% is the 10 years flexible as well?

So, if one were to have omniscient understanding of how the market works, wouldn't one be so kind as to enlighten the rest of us mistake prone dullards?

I think a little appreciation for the work that DGI puts in week after week would be in order. This guy puts out a lot of excellent material that I have learned a lot from. But, then again, I'm not the sharpest tool in the shed.....

If one looks at just the dividend cutters in 2009, they would notice that these companies had excellent total returns off the bottom and for the year. This is because the stocks that are beaten down the most, tend to rebound the quickest and strongest. Some call it a short squeeze.

If you look at the dividend cutters of 2008 however, you would have noticed that many of these firms eventually went to zero, or led to substantial losses to their investors. ( within a year or two).

Overall, buying the dividend cutters and eliminators has not produced much in returns since 1972,according to Ned Davis Research. If you are really good at spotting turnaround stories, I am sure you could earn big returns each year. However, the odds are against you. I like to have the odds in my favor, and to ride the trend of a rising dividend payment. I am fine if someone can figure out how to make money by trading against me.

"If it was sold at 9, but then the proceeds were used to buy, say CAT (which I believe meets the criteria). You could have gotten in at ~$30 while the stock is at ~90. PLUS it would have had a better yield on cost (~5%)."

Hindsight is always 20-20.

" Andy said...@ David:Whoa- that's a little harsh.

So, if one were to have omniscient understanding of how the market works, wouldn't one be so kind as to enlighten the rest of us mistake prone dullards?

I think a little appreciation for the work that DGI puts in week after week would be in order. This guy puts out a lot of excellent material that I have learned a lot from. But, then again, I'm not the sharpest tool in the shed.....

I think if you read my second post I said that DGI " Oh, I didn't mean to be so challenging in my first post, as I wanted to withdraw it right after I posted it, but regretfully could not. You do a pretty good job of researching these stocks and offering up an excellent site for free to the public."

A comment section, I hope, is not to heap praise on the writter but to discuss different aspects of investing. Debate is food for the soul & mind. I'm simply trying to point out that dividends are a lagging indicator of sound fundamentals and using them as a final sell signal, IMHO, is not the best way to sell stocks.

Compare the great payers of today with the list just a few years ago. It is not all fun and games and easy pickings.

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